Underprivileged Managers Have Fewer Opportunities, Better Returns

Asset managers who grew up poor deliver higher returns than those raised in wealthy families, researchers have found.

“An individual’s social status at birth may serve as an important signal of quality in industries with high barriers to entry.”Managers with low-income backgrounds faced higher entry barriers into asset management, and therefore had to perform better to gain access and opportunities, argued Oleg Chuprinin from the University of New South Wales and Denis Sosyura of the University of Michigan.

“Because individuals from less privileged backgrounds have much higher barriers to entry into prestigious positions, only the most skilled types can exceed these high thresholds and build a career in a management profession,” they wrote.

For the study, Chuprinin and Sosyura compared the performance records of mutual fund managers with US Census records on the wealth and income of their parents. They found that most managers came from families that were richer and better educated than the general population, with the average income of managers’ fathers at the 90th percentile of income distribution in the general US male population.

Managers’ fathers obtained an average of 12 years of education, and the managers from wealthier backgrounds were themselves more likely to attend private or more exclusive universities.

However, these managers also delivered consistently worse returns those from more disadvantaged backgrounds, with managers in the top quintile of parental income distribution underperforming those in the bottom quintile by 1.54% per year.

“Individuals from wealthier families have better connections and access to resources, which should aid their portfolio management task,” the authors wrote. “And yet, these same privileges make it possible to make career advancements without showing strong performance.”

For example, Chuprinin and Sosyura found managers with negative or neutral past performance were increasingly likely to be promoted the richer their parents were. A manager from the 25th percentile of parental income had to outperform a manager from the 75th percentile by 0.74% per year to stand an equal chance of promotion.

“Managers with a low-endowed status must deliver higher returns to stand a comparable chance of promotion with their high-status peers,” the researchers concluded. “An individual’s social status at birth may serve as an important signal of quality in industries with high barriers to entry.”